Are Ohio’s Public Pension Systems Being Drained by Hedge Funds?

Lost in the fray of what is probably the craziest election year ever, is a recent report about the health of Ohio’s public pension systems — one that should probably cause any Ohioan paying into those systems a bit of concern.

As outlined in an article by John Damschroder, a former member of Gov. George Voinovich’s administration no less, Ohio’s public pension systems are currently “sinking in the quicksand of terrible investment returns and ultra high expenses.”

According to Damschroder, “Ohio relies on secretive alternative investments more than any state in America” and because of this, the state’s five public pensions ended up paying “outside fund managers a staggering $734.8 million” in 2015 alone, with the state’s largest pension fund, Ohio Public Employees Retirement System (OPERS), shelling out “$428.2 million in external management fees for investment results that fell 99.8 percent from 2014.”

As further analyzed in a recent episode of the Keiser Report on Russia Today, this means the state’s pension funds basically paid almost a billion dollars in just one year to hedge fund managers who have no idea what they’re doing. The state could’ve been better off putting that money into low-cost index funds themselves, or for that matter, just shoving it into mattresses or burying it in the backyard.

But in all seriousness, $734.8 million is an enormous amount of money for Ohio’s 1.8 million active and former public employees to spend on what is clearly a very terrible result. In fact, if every public employee knew just how bad their money was being mismanaged, they’d probably find themselves reenacting a certain scene from the recent film The Big Short, barging into OPERS’ offices and screaming, “Give me my f—ing money back, you motherf—er!” So what gives?

For anyone who needs a reminder of the historical context, OPERS first really started “hedging on hedge funds” in 2011, the first year after Ohio’s darling Republicans swept our statewide offices. At the time, OPERS had decided to invest 3 percent of its assets into hedge funds as part of an overall plan to revamp the OPERS portfolio, which sought to make up some $6 billion of it’s previously $84 billion worth — money lost due to the financial crash of 2008.

Before that, OPERS had trusted in-house advisors to manage roughly 65 percent of its assets, but after the reforms of 2011, the system began hiring external managers to “help boost returns” and create “a more modern portfolio,” according to OPERS’ then deputy director of investments, Rick Shafer. Shafer felt that OPERS could “learn” from the external managers and said the allocation to hedge funds would probably “continue to grow over time.”

Naturally, Shafer proved to be completely right (LOL) and was promoted to OPERS’ Chief Investment Officer last year for doing a helluva job, while this “hedge fund hedging” spread to the state’s other pension systems as well.

Added to this vitriolic financial stew were the Republicans’ continued “sweeping” reforms in 2012, when Gov. John Kasich signed into law multiple bills that further restructured the state’s five pension systems, this time with bipartisan support.

According to The Columbus Dispatch, the changes were projected to “cost workers billions but allow them to maintain defined-benefit plans,” and would do so by increasing employee contributions, computing new final average salaries, requiring longer service and reducing cost-of-living adjustments.

Yes, once again those who were supposed to benefit from the pension systems in the first place had to foot the bill to keep them solvent, but as Damschroder points out in his recent article, even these reforms haven’t really worked since.

Despite the fact that public employees are currently required to pay a minimum of 24 percent of their wages into the pension systems, census data shows “Ohio’s unfunded pension obligation grew from $35 billion in 2014 to $134.5 billion in 2015,” meaning the pensions’ solvency problems have gotten way worse, not better.

Furthermore, “Ohio state government is 100 percent responsible for the payment rates and investment results,” which according to Damschroder, means “Ohio’s claimed portion of the unfunded liability is more than $26 billion.” Isn’t that neat? And to think that when those reforms were passed in 2012, it was because a pension system like OPERS was worried about losing $1 million a day — only to eventually piss away $428.2 million in one year on external management fees alone! Oh, if only there were less than 428 days in a year….

If Damschroder’s claims are to be believed, it’s probably time for Ohio’s public employees to force the nice folks managing their money to face the music. If you’re paying into OPERS or one of Ohio’s other four public pension systems, you may want to pay a visit to their offices and ask Mr. Shafer and his cohorts how their little hedge fund experiment has been going. And if you go, we recommend watching a certain scene from The Big Short for some inspiration.